KBND - Inflation Is Rapidly Cooling - As Predicted - But Is The Fed Listening?
2023-07-18 09:35:00 ET
Summary
- The Consumer Price Index rose just 0.2% in June - and only 3% in the past 12 months - very close to the Fed’s 2% goal. Producer Price Index provided even better news, as it rose only 0.1% in June, the slowest rate in almost three years.
- Treasury bond yields declined, which is a good sign, raising the probability that the Fed might pause at its late July Federal Open Market Committee meeting.
- Only about 8% of U.S. vehicle sales are forecasted to be EVs this year, and affordability remains a major hurdle to most buyers, as well as customer loyalty. The winner of the EV race will likely be the manufacturer that makes affordable EVs with cheaper LFP or LMFP batteries.
The Labor Department reported last Wednesday that the Consumer Price Index ((CPI)) rose just 0.2% in June - and only 3% in the past 12 months - very close to the Fed’s 2% goal. Food prices rose 0.1%, while energy prices rose 0.6%, so the core CPI, excluding food and energy, also rose 0.2% in June and at a bit brisker rate, +4.8%, in the past 12 months. The housing component (Owners’ Equivalent Rent) rose 0.4% in June, which is down but still too high. Also, used car prices declined 0.5% after rising sharply by 4.4% in both April and May. Overall, the CPI came in at the slowest pace since March 2021, while the core CPI is the slowest rate since October 2021. In response, Treasury bond yields declined, which is a good sign, raising the probability that the Fed might pause at its late July Federal Open Market Committee meeting.
The Thursday release of the Producer Price Index ((PPI)) provided even better news, as it rose only 0.1% in June, the slowest rate in almost three years (since August 2020). The core PPI, excluding food and energy, rose 0.1% in June and 2.4% in the past 12 months. Also, wholesale goods declined 4.4% in the past year, so deflationary forces dominate the wholesale level, which indicates lower consumer inflation ahead.
Despite these positive trends, the consumer still feels under assault after two years of rising inflation, so President Biden’s approval rating now stands near an all-time low of 41%, while 54% of Americans disapprove of how President Biden is doing his job. Furthermore, the Fed reported that credit card debt officially hit a record high of over $1 trillion, so many households are still struggling with chronically higher prices.
In the middle of America - in “flyover country,” where Americans tend to drive more - the Biden Administration’s quest to get consumers to switch to electric vehicles (EVs) has hit heavy resistance, despite Tesla’s ( TSLA ) 30% annual sales growth, boosted by recent price cuts. There is currently a 92-day supply glut of EVs sitting on dealer lots, versus a 54-day supply for vehicles with internal combustion engines. Specifically, the inventory of EVs for sale in the second quarter rose 342% in the past year to 90,000.
Only about 8% of U.S. vehicle sales are forecasted to be EVs this year, and affordability remains a major hurdle to most buyers, as well as customer loyalty. Ford ( F ) and GM are finding out is that the buyers of their EVs are not repeat buyers and are not loyal to their brand. As a result, the goodwill that Ford and GM built with their long-term lead in pickup and SUV sales is not apparently transferable to their EV models.
To cut costs in its EV fleet, Ford is retooling its EV manufacturing plants to switch to lithium iron phosphate (LFP) batteries, since it only sold 4,466 F-150 Lightning models in the second quarter, due in part to their expensive lithium-ion batteries. VW Group ( VWAGY ) has also curtailed production of its ID.4 EV, since it is apparently too expensive for most VW buyers due to its expensive lithium-ion batteries. The ultimate winner of the EV race will likely be the manufacturer that makes affordable EVs with cheaper LFP or LMFP batteries, just like BYD ( BYDDY ) has broken out as the market leader in China with its affordable EVs.
As a result of all the Biden Administration’s interventions in motor vehicle sales, the United Auto Workers (UAW) has no t endorsed Biden’s re-election campaign, apparently because they are uncomfortable with the Administration’s big EV push. EVs have fewer parts than vehicles with internal combustion engines, so they require fewer UAW workers. Complicating matters further, Tesla does not have UAW workers. Furthermore, the UAW’s contract with Ford, GM, and Stellantis ( STLA ) expires in the next couple of months.
In America, many folks like their pickup trucks and SUVs - as well as their gas stoves - so any pressure from the government to make them switch to EVs as well as all-electric appliances could receive a big pushback and hurt the Biden Administration’s re-election chances. Probably the best example of a pushback following New York City’s Department of Environmental Protection ((DEP)) proposed rules that would order restaurants to reduce their carbon emissions by 75%, which would effectively require restaurant owners to buy expensive emission control devices on their pizza ovens. This war against iconic pizza joints is not going over well, as pizza fans are now chanting “give us pizza ovens or give us death.”
Obviously, many consumers do not like mandatory, politically based product changes, whether it has to do with vehicles, gas stoves or pizza ovens. However, widespread consumer outrage has more to do with the cash in their pockets than their political beliefs.
Since many Americans still have plenty of cash to spend, the U.S. economy is still recovering, so GDP growth has picked up - mostly due to an improving service sector as well as strong consumer confidence. Right now, the worst that can go wrong is if the Fed continues to raise key interest rates, despite ample evidence of inflation cooling. However, I am more confident than ever that the Fed will decisively hit the “pause” button due to lower inflation rates, as well as the Labor Department’s lackluster payroll data.
It is very unfortunate that the Fed relies on so much unreliable economic data that is tainted by wild seasonal adjustments as well as seemingly endless revisions. The good news is the Fed likes to stay out of the political spotlight, so I expect that they will start to cut key interest rates in December and continue to cut in the first half of 2024 to stimulate overall economic growth going into the election campaign.
This is Historically the Strongest Year of the Presidential Election Cycle
This is a good time to remind you that the third year of a Presidential election term, namely 2023 this time around, is the best-performing year in the four-year Presidential election cycle, and the fourth year is traditionally the second-best performing year in the cycle. Since the major party candidate debates will commence in the upcoming months, I predict that the candidates with the most inspirational messages will break out of the pack as the leaders of their respective political parties.
In his major overseas challenge, President Biden is meeting with NATO to provide Ukraine with cluster munitions - which are banned by over 100 nations. Despite the fact that chaos persists within Russia due to the Wagner Group’s aborted march on Moscow, this gives Ukraine an opening to capture or kill many of Russia’s reluctant troops. All wars are tragic. Both Russia and Ukraine have sustained massive losses. The fact that NATO and the U.S. are helping to escalate this war now - instead of finding a way to end it - is concerning to many parties and I expect will be problematic for the Biden Administration.
The only winners from the Russian invasion of Ukraine are some of the energy and shipping stocks in our portfolios. I wish it weren’t so, but global tensions have made our energy bet look better. In addition to the war and strong seasonal demand, Iran is acting badly, trying to hijack crude oil tankers again, so the U.S. Navy has been trying to thwart Iran in key shipping lanes. Also, many domestic energy producers have boosted their production, which bodes well for their quarterly announcements in upcoming weeks.
I cannot fathom why NATO and the Biden Administration would fund an escalation to the tragic war in Ukraine, especially after the Wagner Group’s pullout. The U.S. Navy no longer guarantees free trade around the world, so hijacking attempts of crude oil tankers and other commercial ships persist. The Biden Administration is doubling down on the Trump Administration’s restrictive trade policies with China and is pushing onshoring, which has not yet succeeded. Let’s hope that a Presidential candidate with a positive vision for both domestic and foreign policy can emerge and help inspire many Americans.
In addition, Europe may be emerging from recession due to war funding. Germany’s factory orders surged 6.4% in May, which is a sign that the eurozone may be crawling out of its recession. Orders for “other transport equipment,” which includes military equipment and ships, surged 137% in May. Overall, the increase in German factory orders is a good sign that its mighty manufacturing sector is resurging.
Meanwhile, China may finally be headed for a recession after nearly 45 years of uninterrupted growth. China’s exports plunged 12.4% in June, while imports declined 6.8%. This is the biggest decline in exports since just after the start of the pandemic. China’s exports to the U.S. declined 24% in June, while its exports to the European Union dropped 13%. I should also add the exports from Japan, South Korea, and Vietnam all declined in June, since consumers worldwide are importing fewer goods.
I envision a second-half scenario where everything is about to get better in the U.S. The Fed will no longer raise interest rates due to favorable inflation data. The CPI and PPI last week proved that inflation has cooled immensely. Corporate earnings are forecasted to steadily improve for the next four quarters. There are at least four improving industry sectors where I can find strong stocks to buy. Although we are in a rolling recovery, more sectors are now participating. What makes America great is that our states are 50 economic laboratories, so even if New York wants to kill pizza ovens, others will succeed and prosper.
Navellier & Associates owns Volkswagen Ag. ((VWAGY)), and a few accounts own Ford Motor Co. ((F)). We own Tesla ((TSLA)), per client request in managed accounts. We do not own General Motors ((GM)), Stellantis ((STLA)), or BYD Company ADR ((BYDDY)). Louis Navellier and his family own Volkswagen Ag. ((VWAGY)) via a Navellier managed account. He does not own Ford Motor Co. ((F)), Tesla ((TSLA)), BYD Company ADR ((BYDDY)), Stellantis ((STLA)), or General Motors ((GM)) personally .
All content above represents the opinion of Louis Navellier of Navellier & Associates, Inc.
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Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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Inflation Is Rapidly Cooling - As Predicted - But Is The Fed Listening?